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Reader Barry Bowen kindly sent in a link to "Get out! Get out! Whoever you are!" an interview at Microsoft Network's Money Central with financial newsletter editor, Richard Russell.
Russell has written the Dow Theory Letters since 1958 and right now he is predicting a major market implosion. I'll let you take a look at the article if you are curious about the Dow Theory and why Russell thinks we are in the beginning of a major bear market. It's not my intention to argue the case with finance theory logic or business school jargon. I'm not qualified. For all I know, Mr. Russell may be absolutely right and we are on the brink of a three to five year bear market that will see the Dow drop to somewhere between 4,000 and 6,000 before a recovery sets in.
Eneida Guzman's interview with Russell is one article in a series that I have read (most called to my attention by Motley Fool readers) since 1996. In essence, they all say the same thing: The market is heavily overvalued by historical standards and history demands a correction.The longer the bull market goes on, the worse the correction will be.
Well, of course.
That is what history tells us. I'm a big fan of history, actually. After all, the Foolish Four is based on a history of high-yielding, low-priced Dow stocks outperforming the market. But history has its limits. The biggest lesson history teaches is that change is the one constant.
Now, I'm aware that "This time it's different" is a very weak argument in the face of all the reasons why the market is too high and is due for a fall. The second biggest lesson we get from history is: The more things change, the more they remain the same. Read Jane Austen if you've any doubt about this.
I readily admit that there are a zillion historical and statistical reasons why the markets should fall. The only reason why it doesn't seems to be that the U.S. economy is incredibly healthy, peace is breaking out all over the world, global markets are opening up, and, let's not forget, this is a peak sunspot-cycle year.
While in the process of reading each of these articles, they all sounded good. I buy into them. I finish them and start thinking -- I really need to get out of the market! What really tempts me, though, is not the idea of avoiding losing money. I'm Foolish enough to believe that the market will come back eventually, and I have enough years before I need that money to weather a fairly severe storm.
What tempts me in spite of my best efforts to resist is the idea of going to cash before a big drop, waiting for the depths of the bear market and then jumping back in. History shows us that that is the way to just slaughter the indices.
So let's look at history. The first time I remember seriously considering going to cash with my retirement portfolio was in mid 1996. I could have sold everything then, but you know what? I would still be waiting for that bear market.
I was lucky. In 1996 my retirement funds were tied up in something close to an index fund, and I didn't have access to them. By the time I was able to trade that account, I had noticed a familiar ring to the articles. And I had noticed that the market didn't seem to be paying attention to them. I had also had a few years of exposure to The Motley Fool philosophy. Had I gone to cash, my portfolio would have gone up maybe 20%, max, from mid 1996 to now. Instead, the indices more than doubled, and I reaped the benefits of that.
OK, so let's say that over the next three to five years, the market corrects and drops 50%. That wouldn't be much fun, but I wouldn't be much worse off in dollar terms than if I had gotten out the first time I was (temporarily) persuaded it was about to go boom. And by staying invested, I will be in the market at the exact right time to profit from the recovery.
I don't like the idea of seeing my retirement funds drop by 50%. But I accept that it may happen. And I accept that I am not very likely to pick the exact right moment to sell or to get back in.
All this won't be much comfort to someone who is considering investing for the first time right now. If you are in that boat, or are really, really nervous about the pending bear market, may I recommend The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History. I recently reread it and, while I don't buy it entirely either, it makes a great antidote to all the prophets of doom and gloom. Cheers!
Fool on and prosper!